Webvan Acquires HomeGrocer in Online Grocery Consolidation

In pursuit of its strategy to become a last-mile Internet-only retailer, Webvan Group Inc. said yesterday it will acquire competitor HomeGrocer.com in a $1.2 billion stock swap by the end of the year.

The acquisition is intended to increase Webvan's geographic coverage, remove competing market overlap, trim costs and engender economies of scale. More critically, it allows the online grocer to focus on its real competition -- bricks-and-mortar stores.

"This merger will allow us to tighten our focus by changing customer behavior, replacing their trip to the store with an alternative to give them back their most precious commodity -- time," said George T. Shaheen, president/CEO of Webvan, Foster City, CA.

Using the Webvan.com brand, the new entity arguably would be the largest online grocer in a category that only recently saw the rescue of a near-bankrupt Peapod.com by Dutch retailer Royal Ahold.

Analysts said the new consolidation can only raise the competitive bar in the market known for its difficulty with the high costs of home delivery and expenses associated with meeting customer product and time requirements in addition to the traditional margins of only 1 percent to 2 percent.

"If you're trying to establish another brand on the Internet in terms of online grocery, you're in deep trouble because the two top competitors are now merged and they'll have all the attention in terms of PR, advertising, et cetera," said Laura Ries, president of focusing consultants Ries & Ries, Roswell, GA.

"People are going to be sort of lambasted with all of their information," Ries said. "I think what we've seen on the Internet is that the rule of singularity really applies, that one brand in each category will probably become dominant and that brand probably will pretty much fight against the real world."

For now, though, the Internet is a mere blip in total retail grocery sales. According to Forrester Research, Cambridge, MA, U.S. food and beverage online sales in 1999, 2000, 2001 and 2002, respectively, are $513 million, $1.13 billion, $2.46 billion and $5 billion -- all under 1 percent.

The consumer migration to online purchases of groceries is expected to continue its tardy pace. Even in 2003 online sales will account for only 2 percent, or $10.83 billion, of total groceries sold before touching 3 percent, or $16.87 billion, in 2004, according to Forrester.

Webvan is not daunted by such challenges. The HomeGrocer deal is just another step toward becoming an all-around retailer. Like Amazon.com, which started retail life as a bookseller, Webvan was born as an online grocer. It has now expanded into pet supplies, flowers, games, office supplies, books, kitchen appliances and electronics, among other items.

"Our vision, from the beginning, has been to be the provider of the last mile of e-commerce," Shaheen said. "In order to do this, we need to continue to rely on a scalable, replicable infrastructure that is able to handle the rise in e-commerce shopping.

"We chose to start with groceries to achieve operational density and order frequency," he said. "By delivering these products to our customers' home within a 30-minute window of their choosing we have established strong relationships that we're now leveraging to other merchandise categories."

Sales for the first quarter of 2000 at Webvan were up 79 percent to $16.3 million, from $9.1 million last quarter of 1999. But losses also rose to $38.7 million in the first quarter, from $25.7 million in the fourth quarter of last year. The best omen for Webvan may be a cash hoard of $540 million at the end of this year's first quarter.

HomeGrocer, Kirkland, WA, was not too far behind. First-quarter sales were up 11-fold to $21.2 million, from $1.8 million in the same 1999 period. Losses for the first quarter were $35.3 million, however.

As of May 30, the combined Webvan/HomeGrocer entity has a presence in nine regional markets around the United States, with 264,000 customers. It ships 6,200 orders a day, with an average order size of $98 and with repeat orders at 75 percent, Shaheen said.

"By end of 2001, we'll be in 15 markets compared to where we'd be on a stand-alone [basis]," he said. "[Also] Webvan will be generating revenues approximately 50 percent greater with better operating margins and requiring less cash."

Still, Webvan has its work cut out for it. Though the Internet is another option for time-constrained shoppers, bricks-and-mortar stores are now doing their best to keep them in the aisles. More people are being hired, store layouts are more customer-friendly and the checkout lines are thinner.

"There is a potential market for people who can't find the time to go to the grocery store and prefer to have their regular lists delivered," Ries said. "[However], it's not going to be a huge [grocery] market specifically because I don't think they can keep the prices low enough to compete with the supermarket."

Webvan prides itself on its fulfillment and warehousing infrastructure -- a key excuse used for the diversification. The HomeGrocer acquisition complements and is meant to bolster Webvan's Internet ambitions.

"Without the merger, both companies had to spend money to win the customer from the brick-and-mortar alternative and then they each had to spend additional monies to win the customer from each other," Webvan's Shaheen said. "The total [amount of spending] now can be more efficiently directed at the brick-and-mortar competitors."

Yet such logic ignores the incompatibility of shipping perishables like groceries with consumer durables. This complicates the shipping process, Ries said. Also, non-perishables may not need pre-set delivery schedules. And, unlike groceries, they may not require frequent replenishment.

"I think the problem remains that Webvan refuses to see themselves as an online grocer," Ries said. "They're taking a play out of the Amazon book, saying 'we're going to be online everything,' which is a mistake."

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